Still, Obama suggested that Palestinians should not make it a condition to resuming peace negotiations with Israel. He says there's no point to negotiations if the expectation is that everything must be figured out in advance.
"We do not consider continued settlement activity to be constructive, to be appropriate, to be something that can advance the cause of peace," Obama said. But, he added, "the politics there are complex and I recognize that is not an issue that's going to be solved immediately, it's not going to be solved overnight."
Palestinian Authority President Mahmoud Abbas, appearing alongside Obama at a news conference in Ramallah, West Bank, said Israel must stop illegal settlement building to advance peace talks.
"We are not claiming anything that is illegitimate or illegal," Abbas said in Arabic. "Therefore, we require the Israeli government to stop settlements in order to discuss all our issues and their concerns."
Obama said Palestinians deserve an independent and sovereign state and an end to occupation by Israel. He said the prospect of a contiguous Palestinian state alongside a Jewish state of Israel continues to exist if negotiations would restart.
"I absolutely believe that it is still possible, but I think it is very difficult," Obama said. He also said it would be helpful if rockets weren't still being launched into Israel.
Abbas said he told the American leader that peace with Israel should not be achieved through violence, occupation, settlements, arrests or denial of refugee rights.
Obama was visiting the West Bank on his second day of a Mideast trip after spending a day in Jerusalem. He said he spoke of the settlements during meetings with Israeli Prime Minister Benjamin Netanyahu.
Since 1967, Israel has built dozens of settlements in the West Bank and east Jerusalem that are now home to 560,000 Israelis - an increase of 60,000 since Obama became president.